WHAT IS RISK MANAGEMENT?

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Overview

Risk management is the continuing process to identify, analyze, evaluate, and treat loss exposures and monitor risk control and financial resources to mitigate the adverse effects of loss.

Loss may result from the following:

financial risks such as cost of claims and liability judgments

operational risks such as labor strikes

perimeter risks including weather or political change

strategic risks including management changes or loss of reputation

Enterprise Risk Management, expands the province of risk management to define risk as anything that can prevent the company from achieving its objectives.

Although accidental losses are unforeseen and unplanned, there are methods which can make events more predictable. The more predictable an event, the less risk is involved since the occurrence can prevented or mitigated; or, at minimum, expenses can be estimated and budgeted. It is this process to make loss more predictable that is at the core of insurance programs.

The key to an economical and efficient risk program is control over the risk management functions with assurance that actions performed are desirable, necessary, and effective to reduce the overall cost of operational risk.

A risk management program is formulated and evaluated around the cost of risk.

The cost of Risk is comprised of:

Retained Losses - Deductibles, Retention or Exclusions

Net Insurance Proceeds

Cost for Loss Control Activities

Claim Management Expense

Administrative Cost to Manage the Program

The benefits of a risk program should result in overall savings to the corporate entity when evaluating these components in the aggregate. Any one specific category may show an increase or decrease in cost when considered individually or by division in a specific time frame.

Types of Loss Exposures within the province of risk management include:

Property - Real & Personnel, Tangible & Intangible

Net Income - Reduction in Revenue or Increase in Expense; can be due to loss of Property (yours or suppliers, or customers) or loss due to Civil or Statutory fines and judgments, or by loss of Key Personnel

Insurance transfer to a non-owned insurance company when and if the exposure is insurable and the cost is not prohibitive.

Risk Management is concerned with all loss exposures, not only the ones that can be insured. Insurance is a technique to finance some loss exposures and, therefore, a part of the broader concept of managing risk; not the other way around.